ARE YOU PLANNING YOUR PERFORMANCE?

By Steve Bina

In one of my last articles, I wrote about establishing Key Performance Indicators (KPIs) to track the performance of your business. Hopefully, you have started establishing those KPIs to measure how your business is doing. A very useful tool to help you establish your KPIs is the budget you create for your business. So, how do you go about creating a budget, and what does it look like?

To get started, let’s define what a budget is or should be. Your budget is simply a plan for your money. Creating a budget creates a road map showing where your money should go so you don’t end up wondering where it went. For budgets to be effective, they need to be created with enough detail to measure what’s happening in your business and that you can accurately track. The function of a budget is to track the revenue you generate and the expenses you incur to generate that revenue and, hopefully, to ensure the expense number is less than the revenue.

In creating a budget, there are a number of steps you can take to get it done right. Here are some suggestions to make sure your efforts are meaningful. 

Budgeting is an ongoing process

Sometimes budgeting is thought to be a one-and-done exercise. You sit down with your accountant or financial/business advisor and figure out how much you’ve been spending. Then, you make a plan for what you plan to spend in the next year. If that is all you do, set and forget it, then you’re missing the most important part of budgeting.

The best way to successful budgeting is to recognize that it is an ongoing process. Creating the initial budget usually covers a 12-month period. However, to make a budget a more useful tool, you should break it up into monthly buckets. The ongoing process is comparing the actual expenses for each period with the initial projections and making needed adjustments. Most of the time, those adjustments come in amending spending but could come as increases in the budget, both revenue and expenses, or adjustments in timing. Regardless, intermediate reviews keep your budget relevant.

What is your revenue stream

This can be difficult to forecast. Your business likely has multiple revenue sources: new product sales (analog bike and e-bike), used bikes, service, parts, and accessories. The best move is to budget the revenue from each of those individually, though you’ll want to combine them for a monthly total.

Along with the different sources of revenue, you’ll also have to contend with seasonality when preparing the budget. Each sales department will have its own timbre, and history will play a significant role in setting revenue targets.   

Making assumptions about your revenue is an important step when preparing your budget. It will set the baseline against which everything else will be determined. Your sales history is a good place to start when working on seasonality once you’ve established your sales projections for the coming year.  

Add up the necessary expenses

Necessary expenses are what you have each month to run your business. The top line will likely be your payroll for employees. That means you’ll need to determine the number of employees you’ll have each month, and remember, there likely is a seasonality to your staffing, too. In conjunction with the number of employees and payroll expenses, you should also determine the expense for any/all fringe benefits.

You should segregate your expenses into fixed, variable, and discretionary. Fixed expenses would be those that are necessary, recur monthly, and don’t change based on sales or seasonality. Variable expenses would be necessary, recur monthly (or maybe a couple of times a year), and will change based on sales and/or seasonality. Discretionary expenses are those not necessary to run the business but which are of benefit to the business, possibly increasing sales, fostering community outreach, and others.   

Expenses to be considered would include;

Rent/Mortgage Utilities

Insurance Shop Supplies

Office Supplies Credit Card Processing Fees

Cost of Goods Sold Marketing

Promotional Items Sales Spiffs

Advertising Uniforms

The expense types above are suggestions. You will have others. These suggestions might be too broad. You may have greater detail for your expenses and will wish to budget accordingly. Regardless, establishing budget figures for each expense item will allow you to track those expenses and keep you financially on track through your fiscal year. 

Compare and adjust

Now that you have both revenue and expense budgets set, you need to compare them. Hopefully, the revenue number is greater than the expense number. One set of numbers to be especially aware of is the overall revenue number and the cost of goods sold. There will hopefully be a positive result of this comparison, so that the profit will pay for the other expenses of your business. You have established a profit margin for each type of revenue source, as mentioned earlier. This specific exercise will point out where you may have to adjust your margins and/or projected sales volumes. 

Once you are satisfied with the profit your budgeted sales will generate, you can compare that against the other expenses. Again, hopefully, the profit from the revenue will be greater than the consolidated amount of the expenses. One key part of the analysis is the seasonality of both the revenue/profit and the expenses. It’s not imperative that each month’s revenue exceeds the expenses, but it is important that this is the case for the whole year. 

If that isn’t the case, you need to either increase the revenue/profit or reduce expenses to offset the loss. Occasionally, the monthly budget may be a loss, which is OK as long as you plan accordingly and make up the loss in subsequent months.  

Implement and track       

Now that you have the budget where you want it, it’s time to put it into action. Start selling and spending based on the budget you created.

Implementing the budget is more than just keeping your spending in line and generating the projected revenue. Once you begin running your business using the budget you’ve prepared, you need to track actual performance to identify any weak spots and/or recognize overperformance and possibly extend that performance.

The best way to keep track of your performance? Whatever works best for you. That could mean using a budgeting app, a spreadsheet, or maybe just pen and paper. Regardless, keeping track is imperative if you aren’t going to track your performance, then there is no reason to make a budget.

Do you have a plan for your performance?

Contact Steve Bina: steve@humanpoweredsolutions.com